Days Payable Outstanding

How is it calculated?

Days Payable Outstanding = 365 / Accounts Payable Turnover Ratio

Goal of the Ratio

The goal of this ratio is the same as the Accounts Payable Turnover Ratio; however rather than expressing the ratio as how many times a borrower’s accounts payable turns over each year (payoff re-advance, payoff, re-advance), the ratio is divided into 365 days to show the average number of days to pay their accounts payable.  Many times this expression is much easier for people to grasp and understand even though the end goal of the ratio is the same as the Accounts Payable Turnover Ratio.

When is it used?

This ratio is used when the borrower has a high degree of accounts payable.   

Rules of Thumb

There is no rules of thumb for this ratio, but rather this ratio should be viewed in the context of what is typical for the industry. 

What changes in the ratio could mean:

Some example reasons why the Accounts Payable Turnover Ratio can change:

Increases

1. Borrower is unprofitable and they are partially supplementing operations by not paying their accounts payable as quickly
2. Suppliers have increased their credit terms for the borrower

Decreases

1. Borrower is profitable and they are paying their accounts payable more quickly
2. Suppliers have decreased their credit terms for the borrower

Other Relevant Terms

• Capital
• Balance Sheet
• Working Capital
• Accounts Payable Turnover Ratio
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